The Values Debate: Automated Valuation Models (AVMs) Are a Hot Topic among Lenders, Regulators, Rating Agencies and Investors. Many See Potential for More Widespread Use of These Models, Yet Obstacles Exist Such as a Lack of Full Market Coverage and No Standards to Compare One AVM with Another

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THERE'S A LOT OF BUZZ THESE DAYS SURROUNDING AUTOMATED VALUATION MODELS (AVMs). Both lenders and mortgage investors are using AVMs more frequently, especially as models become more sophisticated and vendors gain better access to property data. [??] AVMs are being used in new ways--such as for fraud detection and for marketing--and across a wider variety of mortgage products. [??] AVMs have already gained a strong foothold in the home-equity and second-mortgage businesses, according to Bill Sullivan, group vice president of sales and marketing for TransUnion Settlement Solutions Inc. (SSI), Wilmington, Delaware. Acceptance in the first-mortgage sector has been slower, he says. [??] "There really isn't a lot of secondary market acceptance right now to buy loans that are originated on first-mortgage transactions that are solely based on an automated valuation model," Sullivan says. [??] But many see that changing. "I think the next frontier is purchase transactions with 20 percent or more down," says Rob Walker, president of First American Real Estate Services (RES), Anaheim, California. [??] "While I don't see it happening on a large scale today, there are pilot programs out there [with the secondary market agencies] that use AVMs in lieu of appraisals under certain factual circumstances," he says. [??] Craig Focardi, senior analyst with TowerGroup, Needham, Massachusetts, estimates that 25 percent to 30 percent of home-equity transactions use AVMs. Anecdotal evidence from several large lenders suggests AVM use of 50 percent and higher on home-equity loans, Focardi adds. [??] Focardi pegs AVM usage on first-mortgage transactions at 6 1/2 percent currently. He sees some individual lenders using AVMs on more than 10 percent of their first-mortgage transactions. TowerGroup predicts that AVM use in the first-mortgage sector will increase to about 17 percent in 2008, Focardi adds. TowerGroup's estimates on AVM use include insured AVMs, as well as appraiser-assisted and desktop models, Focardi says. Sources interviewed for this article peg the frequency of using AVMs in the home-equity sector at anywhere from 40 percent to 70 percent of transactions.

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The gatekeepers

Acceptance by the government-sponsored agencies (GSEs) and Wall Street investors will be key to more widespread use of AVMs in the first-mortgage market. Fannie Mae and Freddie Mac are already accepting AVM valuations on low-risk loans from a few select lenders, numerous sources confirm (see sidebar, "GSEs' Perspective on AVMs").

As the mortgage industry looks for new ways to cut costs and cycle-time, more lenders are eyeing AVMs. In turn, investors are realizing their benefits as well, says Greg Hansen, chief executive officer of Hansen Quality, a Fidelity National Financial Company, San Diego.

"First, AVMs were used as a reviewing tool, then on home-equity loans. Now [Wall Street investors] see that AVMs can probably be used to make first-mortgage loans. Wall Street is seeing the level of sophistication and accuracy [of the AVM products]," Hansen says.

The availability of property data and the models have improved considerably in recent years, Hansen adds. "AVMs are being used more today for purchase and refinance mortgages," he says.

"From the lending community there's been huge acceptance of AVMs," says Tony Merlo, president of eAppraiseIT, a joint venture between The First American Corporation and LandAmerica Financial Group.

"Lenders are excited about all the benefits to consumers and to themselves. AVMs are faster and cheaper," Merlo says. And with insured AVMs, such as eAppraiseIT's EagleCert[TM], "lenders have the security that if the AVM misses the mark, they come back to us and we write a check and make it right for them," Merlo says.

But, Merlo adds, "Lenders need to sell the loans to the secondary market, and the GSEs have been somewhat slow to analyze and approve AVMs. …